Diamond secrets unveiled!

By IBT Staff Reporter On 07/06/10 AT 8:24 AM

Immediately after the Tel Aviv Meet on Zimbabwe's blood diamonds, the world was abuzz with the diamond controversy.

Several newspapers carried articles on the blood diamonds and the Zimbabwe mine fields. Diamond jewelry is a powerful symbol of status and love, and a $72 billion-a-year retail business worldwide. Diamonds can also be a key source of funding for violent conflicts in Africa. A series of wars bankrolled by blood diamonds in the 1990s prompted the United Nations to pressure De Beers and other jewelry industry giants to set up a program known as the Kimberley Process Certification Scheme to track the origins of each stone and assure customers that their diamonds are free of the stains of war and misery. But late last month, a four-day Kimberly Process meeting in Tel Aviv foundered over the question of whether to approve the export of diamonds from the Marange fields of Zimbabwe, where torture and murder go unpunished and profits fund the repressive party of President Robert Mugabe.

In a recent article the Washington Post unveiled the secrets of diamonds. The article said: Although you won't stumble across a diamond while digging in your tomato garden, they are far more common than their cost suggests. The big gem companies aggressively control the supply that arrives at market, creating artificial scarcity and high prices. This practice was born in the diamond fields of South Africa in the 1880s, when Cecil Rhodes, the chairman of De Beers Consolidated Mines, discovered that he could inflate prices at will simply by locking up the rights to every diamond mine he could find. His successor, Ernest Oppenheimer, developed a complex network of wholesalers that gave De Beers effective control of up to 90 percent of the world's rough-diamond trade through most of the 20th century, as the company hoarded stones in basement vaults and doled them out strategically.

The Oppenheimer family's iron grip on the global supply chain fell apart in the 1990s when Alrosa, a diamond company owned by the Russian government, and the Argyle Diamond Mine in Australia began to sell their stones independently. De Beers's share of the rough-diamond trade is now 40 percent and falling.

Interestingly, though, the end of the De Beers monopoly has not led to aggressive underbidding: Everyone involved seems to recognize that price wars could kill the diamond goose. And stockpiling still happens. Although a healthy 163 million carats or so are mined annually, a certain amount of that yield is withheld from the marketplace. Alrosa, in particular, sold a substantial percentage of its diamonds to a metals bank in 2009 rather than risk flooding the market in shaky economic times.

The Kimberley Process has always been more like a low brick wall than a prison fence. It soothed the public and stopped the most timid criminals, but those who want to skirt it can easily find a way. The most frequent scam is to move diamonds across a border and have them relabeled. To take one example, the human rights group Partnership Africa Canada has shown that Guinea exports far more diamonds than it could hope to produce. The stones are coming from somewhere else, highlighting the strength of smuggling and money-laundering networks that could be used to transport blood diamonds should another war break out in the region.

In some cases in which smuggling was too blatant to ignore -- as in the Republic of Congo, the Ivory Coast and Venezuela -- the Kimberley committee took years to respond. When it finally investigated, it did so with an eye toward appeasing the host governments rather than cracking down on core problems.

Another weakness of the Kimberley Process is that it does not have a comprehensive definition of conflict. It has thus ignored multiple outbreaks of violence and pillaging in African diamond fields because there was no war -- in the classic sense of one state fighting another or a state vs. organized rebels.

The Kimberley rules certainly never anticipated a situation like the one in Zimbabwe. The Marange diamond fields, containing some of the most plentiful deposits in the world, were discovered in 2006; soon afterward, Mugabe's soldiers moved in with helicopters. According to Human Rights Watch, they massacred at least 200 independent miners, then set up shop using conscripted laborers, including children. Because Kimberley has no provisions for what happens when a sovereign government kills its own citizens, it seems likely that Mugabe diamonds will be hiding in the global supply chain for some time.

The tradition of the diamond engagement ring was largely concocted in the 1930s by De Beers's ad agency N.W. Ayer & Son -- the same Madison Avenue shop that would later craft the wildly successful slogan 'A diamond is forever'. Through magazine advertisements and Hollywood product placements, American customers were sold the idea that even a man of modest means must give a diamond to his betrothed, just as kings and aristocrats had done in several examples cherry-picked from European folklore.

In fact, diamonds historically served as tokens of statist privilege more than anything so frilly and ordinary as love. De Beers's appeal to royal fantasies (and, more subtly, male fears of inadequacy) nonetheless caught the American public's imagination, as did the notion that a groom is supposed to spend two months of his salary on a rock. This, too, was an invented custom. It was also flexible: In ad blitzes elsewhere, British customers were told to spend one month's salary, while the Japanese were told to spend three.

Setting up a tollbooth at the gates of marriage was a brilliant move. But even so, history shows that diamond sales tend to mirror general consumer spending on luxuries. When hard times come along, diamonds are among the first items scratched from a shopping list. After the market spasms of 2008, diamonds had their worst year in decades, and even the resilient bridal market suffered. Total sales reportedly plunged 20 percent in the United States, and this spring, De Beers slowed work at its mines.

This isn't the first time that a recession spurred some reconsideration of the diamond ethos among consumers. The Asian currency crisis of 1997 tore a hole in the Japanese diamond market: Nearly every bride in that nation used to go to the altar wearing a diamond engagement ring. That's no longer the case today.

Bad press on humanitarian issues seems to have had a lesser effect, though. Even after the December 2006 release of the movie Blood Diamond, a Leonardo DiCaprio action-adventure that paints a harrowing portrait of the African diamond trade, jewelers reported a reasonably good Christmas season.

This handy mnemonic - color, cut, clarity and carat - was developed in the 1940s by the Gemological Institute of America, still the world's premier diamond-grading company.

Lore holds that every diamond is unique and a work of nature's art. But this idea was intimidating to American customers who wanted a firm readout of a diamond's worth before buying it. De Beers therefore loved the Four Cs, and the company sent speakers on a promotional tour to explain these standards as if they had been observed for centuries.

But when it comes to the most popular kind of diamond -- the round, brilliant-cut stone that is a staple of engagement solitaires -- a key factor embedded in the cut rating is likely to have a big impact on value. The depth percentage, the relationship between the stone's top and the angle of its slanted sides, can make a diamond's glitter a little more spectacular thanks to the physics of light. The sweet spot? A ratio of 58 to 60 percent. Too many buyers of stones of less than two carats get hung up on minor gradients of color and clarity, which are invisible to the naked eye and meaningful only at the cash register.

For those who don't plan to routinely ogle their stone under a microscope, an easier formulation would be the Two S's: size and sparkle. The resale value of a diamond drops between 30 and 50 percent the moment you walk out of the store with it (a sixth myth is that they are good investments; they aren't) so you might as well enjoy its illusory light while you can.

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